Gap between WTI Midland, WTI Cushing widens

Published 11:45 am, Tuesday, November 20, 2012

Growing production from a revitalized Permian Basin has challenged the region's infrastructure designed to move the production to market.

Now tight takeaway capacity is being felt in producers' pocketbooks.

A study just released by Bentek Energy reports that the price differential between West Texas Intermediate Midland and West Texas Intermediate Cushing grew to over $6 a barrel since Oct. 1, with Cushing fetching the higher price. The company said that price spread is expected to remain wide until next year as production exceeds takeaway capacity.

Bentek said Permian Basin production is currently exceeding takeaway capacity and local demand by 40,000 barrels a day, up from 14,000 barrels a day in early October. Not until next year, when Sunoco's West Texas Gulf and Magellan's Crane-to-Houston pipeline expansion g online will the price gap begin to narrow, Bentek said. However, oil production may also be curtailed over the next few years by constraints in Permian gas processing.

"This is not that unusual," commented Doug Robison, president of ExL Petroleum, noting that production levels and takeaway capacity "have been way out of balance for quite awhile."

Robison added that the differential between WTI Midland and Cushing has caused some uncertainty among area producers and was a topic of discussion at the recent Permian Basin Petroleum Association annual meeting.

Jim Klingsporn, energy analyst with Bentek's oil group, agreed that the differential may provide less incentive to drill wells. He observed that future pipeline plans have Permian Basin crude moving to end markets on the Gulf Coast rather than going through Cushing, Okla.

Even more takeaway capacity will be needed in the coming years, the study said, predicting takeaway capacity will again be severely constrained by the end of 2016 if the BridgeTex pipeline is not built.

Klingsporn said there had been indications the pipeline might not proceed, but on Nov. 19 Magellan Midstream Partners and Occidental Petroleum announced they are proceeding with the pipeline, which will transport Permian Basin crude from Colorado City to Houston. The 400-mile pipeline will be capable of transporting up to 300,000 barrels per day with access to refineries in the Houston Ship Channel, at Texas City and other Gulf Coast refineries via third-party pipelines. It is expected to begin service mid-2014 subject to receiving necessary permits.

Producers and midstream companies are both adjusting to what Robison called a paradigm shift caused by the growth of unconventional resource plays in the Permian Basin, such as the Wolfberry, Wolffork and Wolfbone.

"Midstream companies see a need to get ahead of production that they didn't in the past," he said. "We're already seeing quite an investment" in pipeline infrastructure. The concern, Robison said, is "are we going to do to crude oil what natural gas has done -- overproduce the market?"

He takes a positive view, saying the forecasts he has seen indicate a healthy market -- barring unforeseen economic calamities.

"The challenge for oil producers is meeting demand, while gas producers are challenged to create a market," Robison explained. Noting that the Obama administration has put western reserves off limits, "That makes what we do more valuable."

If, he concluded, "the federal government gives us a chance and backs off regulations, the country could achieve energy independence in 10 years." He cautioned that energy independence does not equal low oil prices, it merely means the nation would no longer be dependent on foreign oil, especially from hostile sources.

"The failure of this country to establish an energy policy other than military is frustrating and a dereliction of duty," Robison said. "If the industry fails to provide energy, what the Northeast experienced after Superstorm Sandy is what the entire country will experience."